Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 35% standar

Question

Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations.

CVx =  

CVy =  

Calculate each stock's required rate of return. Round your answers to two decimal places.

rx =  %

ry =  %

Calculate the required return of a portfolio that has $10,000 invested in Stock X and $5,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.

rp =  %

Explanation / Answer

Coefficient of variation = Risk per unit of return i.e. Standard Deviation/Expected Return

CVx = 0.35/0.095 = 3.68

CVy = 0.25/0.125 = 2

Lower the CV, better it is

Required Rate of Return using CAPM Model = Rf + Beta* market risk premium

Rx = 6 + 0.8(5)= 10%

Ry = 6 + 1.2*5 = 12%

Required Return of Portfolio = 10*10,000/15,500 + 12*5500/15500

= 10.71%

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